Australian Dollar, Gold Rally as Fed’s Policy Stokes Risk-Appetite

Fundamental Headlines

• Bernanke Makes Case for More Bond Buying – Bloomberg

• French Socialist Pledges Retirement Age Cut – Bloomberg

• ECB at Centre as Greek Debt Talks Resume – Reuters

• Durable-Goods Orders Jump – WSJ

• More Drones, Fewer Troops – WSJ

European Session Summary

After the U.S. Dollar sold off across the board late in North American trading yesterday, it appeared that some relief was on the horizon, with the Greenback clawing back in early Asian trading on Thursday. This was merely a short-term correction, and by the time European markets opened up, the higher yielding currencies continued to surge.

Ahead of yesterday, the U.S. Dollar was primed for a strong year; after the ill-advised policy decision, one that does little more than buy time for banks to shore up their balance sheets, the U.S. Dollar is poised to be one of the worst performing majors in 2012. The implications of the Fed’s decision go beyond this year, however. Now, with low rates indicated for the next two years, the groundwork for the American Lost Decade – no different than Japan’s – has been laid.

Of interest has been the price action displayed by gold, which has surged through the $1700 per ounce mark and maintained its gains ahead of trading in New York. To me, this is a clear indication that market participants are worried about the U.S. Dollar losing its value substantially over the next few months. The key to watch would be the short-end of the U.S. Treasury yield curve: if these rates turn negative, the demand for precious metals will pick up.

AUD/USD 5-min Chart: January 25, 2012

Charts created using Marketscope– Prepared by Christopher Vecchio

Overall, the commodity currencies, mainly the Australian and New Zealand Dollars, are up big on the day, pacing gains against the Greenback ahead of trading in New York. The European currencies were also slightly firmer, though it’s worth noting that they continue to lag the higher yielding currencies, as expected. With more easing expected out of the Bank of England and the European Central Bank, this is a trend that is expected to continue over the coming months.

24-Hour Price Action

Key Levels: 14:20 GMT

Thus far, on Thursday, the Dow Jones FXCM Dollar Index is lower, trading at 9800.18, at the time this report was written, after opening at 9884.24. The index has traded mostly lower, with the high at 9931.27 and the low at 9781.99.

--- Written by Christopher Vecchio, Currency Analyst

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